Fed signals a December hike as it upgrades economic outlook to 'strong'

The Fed held kept rates unchanged on Wednesday, though it made clear that it intends to raise rates again at the final meeting of the year in December. The decision was not unanimous, with two members, Governor Cook and Cleveland Fed President Hammack, dissenting in favour of an immediate 25bp hike - we were somewhat surprised that hawk Logan opted for a hold.

The changes made to the rhetoric were also hawkish. The Fed upgraded its classification of economic activity to “strong” from “solid”, and added a line in the statement that said more information would allow if to determine the appropriate policy stance, which is probably about as explicit a signal for a hike at the next meeting we’re likely to get from this Fed. The other key takeaway was structural, which you can read more about in our FOMC October Meeting Reaction report.

The dollar drifted a little lower following the Fed meeting, which we probably think is due to the already hawkish expectations heading in, which left the Fed a lot to live up to.

A December hike remains our base case, though the fact that the Fed is saying that consumer inflation concerns are short-term and that previous tightening was already doing some work suggests that calls for aggressive hikes in 2027 are overdone - something that we have been saying for a while.

Focus now turns to Tuesday’s midterm elections, with a Republican clean sweep seen as the big tail risk for markets and the dollar.